It’s Getting Very Costly to Worry About Covid in Stock Market

By late October, evidence was everywhere that the coronavirus was spinning out of control again. Case counts were up and infections were spreading. Stocks were teetering, down a second month, while the election was dividing voters like few before it.

In an earlier era, circumstances like those would’ve made mouths water among short sellers. In 2020, when there are very few bears even left, the result of acting on them has been costly. Traders betting on a slide absorbed a $163 billion loss in November, adding to an already maddening year.

This is how it’s been throughout 2020. Punishment has been swift for almost any skeptical instinct. Views that seem logical on their face — that the election would sow pain, that a recession would kill the rally — immediately became money-losers.

For people observing it all and wondering why the market never goes down, this conditioning is a part of the calculus. While November has felt rough in the headlines, in the stock market it’s rapidly taking its place among the best months ever recorded. Whatever the reason — and almost everyone on Wall Street will tell you it’s the Federal Reserve — investors have been taught that the best strategy is to sit still.

“It’s been almost impossible being bearish,” said Chris Gaffney, president of world markets at TIAA Bank. “The Fed sets us up to be very anti-bearish going forward, even with bad Covid news, even with economic shutdowns.”

Up 8.8% this month, the S&P 500 is on track for its best November since 1980. Pretty much everything is rising. Fewer than 50 stocks in the benchmark have fallen, while 98% of the index’s members have gained since the bottom on March 23. The Russell 2000, up 16% in 15 trading sessions, is headed toward its best month in two decades, while value stocks are in the midst of one of their biggest revivals.

Such a universal lift has pushed a Goldman Sachs Group Inc. basket of most-shorted stocks to a record, up 27% this year and 19% this month alone. In a treacherous twist for anyone who dare bet against equities — even in a year dominated by so much bad news — the most hated stocks are trouncing the S&P 500 by the most since 2013.

So harrowing has it been that bears are giving up. At the end of October, the median S&P 500 stock had outstanding short interest accounting for just 1.6% of market capitalization, the lowest level since at least 2004, data compiled by Goldman Sachs show.

This month through Wednesday, investors betting on a fall in the S&P 500 were down $163 billion in mark-to-market losses as the index gained about 9%, data compiled by S3 Partners show. That zapped the $135 billion they’d managed to make this year through October, the data show.

While this month’s rally has been dominated by unloved areas of the market, it’s technology stocks that have been responsible for the bulk of short sellers’ losses, with the S&P 500 information technology sector still up 9%. Traders betting on declines in Apple Inc., for example, are down near $12 billion so far this month.

An example of how treacherous the terrain is for bears came late Thursday, when Treasury Secretary Steven Mnuchin sent a letter to Fed Chair Jerome Powell demanding the return of funds the Federal Reserve had earmarked for markets. While thespat caused stock futures briefly to buckle overnight, the loss was clawed back when traders decided nothing could keep the central bank from offsetting the forfeited money by loosening its own policy levers.

This is a particularlystrong bull case for stocks. That even if a vaccine ends up promoting a sturdier revival among businesses, Powell is unlikely to turn off the money spigot anytime soon. Such two-pronged jolts, when the economy is growing while interest rates are held down, have ignited some of the scarier rallies in stock market history.

Investors almost universally cite policy for the rise in risk assets.

What has changed this year is “we had a breaking point in terms of what the policy play-book is going to be whenever we get a growth downturn from here,” said Evan Brown, head of multi-asset strategy at UBS Asset Management, referring to aggressive stimulus. “There’s probably a higher floor to multiples because the market will know that as soon as we hit that recession, you’re getting not just the monetary policy offset but fiscal as well. And so what that does is cut off the left tail and leaves markets to explore higher multiples perhaps than would have been the baseline before.”

“You have the Fed helping you, interest rates likely to stay low. I think we end the year strong because people will be anticipating that renormalization,” said Chris O’Keefe, managing director at Logan Capital Management. “Every time the market has pulled in, it’s been a good buying opportunity. There’s that desire to chase that momentum.”

“Markets always feel it’s difficult to be bearish when there is such a large degree of federal coordination, fiscal and monetary policy helping to support the markets,” said Matt Forester, chief investment officer of BNY Mellon’s Lockwood Advisors. “Markets have become accustomed to these short-term volatility events that recover very quickly, and I think that does condition them to come in and buy the dip whenever there’s any challenges.”

If anything, investors are growing more bullish. The latest fund manager survey from Bank of America Corp. showed participants were themost optimistic since January 2018. The most recent estimates from the Investment Company Institute show long-term mutual and exchange-traded funds saw $20 billion worth of inflows from Nov. 5 to Nov. 11, thelargest in four years.

Such optimism has contrarians making comparisons to periods of stock market euphoria, calling for a pullback, or at least a pause, in the relentless climb. Bank of America strategists say it’s time to start selling risk assets as the market is close to “full bull.” Cantor Fitzgerald’s Eric Johnston is still optimistic long-term, but he’sturned bearish on stocks in the short run. It may be from a low base, but short sellers have already upped their bets in November, adding $3 billion of shares shorted to their positions, data from S3 Partners show.

As Jeanette Garretty, chief economist at Robertson Stephens Wealth Management, puts it, it may not pay to be bearish, but that doesn’t mean investors should let their guards down. The economic damage from Covid-19 has not been as deep as initially expected, and the response from policy makers was notably quick. Still, risks remain.

“Not to say all the damage has been avoided and not to say that there are not lingering strains,” Garretty said. “Bearish to me is a long-term statement, I think to be cautious is not to be bearish. I do advocate being cautious.”

— With assistance by Lu Wang, Vildana Hajric, Claire Ballentine, and Katherine Greifeld

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